Many quantitative managers of equities have recently reported underperformance of their strategies using a multi-factor approach involving the value, quality, low risk and momentum factor styles. It is not the first time this has happened. What is different now is that poor performance can be attributed mainly to value factors. What is more, long-only portfolios have suffered additionally.
In this paper, we address a number of questions. They include
- Is equity factor investing still relevant? We firmly believe so.
- Did all factors fail recently? Quality and momentum worked well.
- Was it helpful to neutralise beta, macro-sectors and target constant risk? Yes, such choices have been extremely helpful over time!
- Was it helpful to diversify the number of factors in each factor style? Yes! This significantly increased the risk-adjusted returns.
What should we expect now?
The paper argues that some of the recent trends seem largely overstretched. The valuation gap between cheap and expensive stocks is historically high. The same goes for the level of concentration in the market capitalisation benchmarks. Will these trends continue? We think multi-factor strategies are now likely to start coming back as factor performances re-normalise, even if this may take time.
Read Equity factor investing: Historical perspective of recent performance
